Regional Electricity Distributor One (RED 1): briefing

Meeting report

MINERALS AND ENERGY PORTFOLIO COMMITTEE
5 November 2004
REGIONAL ELECTRICITY DISTRIBUTOR ONE (RED 1): BRIEFING

Acting Chairperson: Professor I Mohammed (ANC)

Documents handed out:
Comments on the Electricity Distribution Industry (EDI) Restructuring and Establishment of RED 1
RED 1 Creation: Program for City of Cape Town PowerPoint presentation

SUMMARY
A City of Cape Town delegation briefed the Committee on the establishment of the Regional Electricity Distributor 1. In essence, the Regional Electricity Distributor would consist of the electricity distribution assets and services of the City Council and Eskom's Western Region. The City was busy ring-fencing its electricity functions in anticipation of them being absorbed into the RED by no later than 30 June 2005.

Members were concerned at the future of Eskom's distribution assets; whether local rates and taxes would be increased to cover the City's anticipated revenue shortfall and whether the City's pro-poor and indigent policy really reached its target.

MINUTES

City of Cape Town briefing
The City's delegation was led by Mr S Mowzer, Mayoral Committee Member: Trading Services, and Mr M Marsden, Executive Director: Development and Infrastructure. Mr Mowzer presented a general outline while Mr Marsden presented a technical report on the Regional Electricity Distributor (RED) 1 establishment process.

National Government had decided that all existing electricity distributors would be rationalised into six REDs. The City of Cape Town and Eskom (Western Region) had been chosen as the pilot project for the establishment of RED 1. This had to be completed by no later than 30 June 2005.

The City Council had resolved on 24 June 2004 that it would fully support the pilot project and had launched a Section 78 investigation (deriving from the Municipal Systems Act) into its feasibility. A draft report would be presented to Council on 8 December 2004.

RED 1 would comprise 39 local municipalities, 16 district management areas and one metropolitan area stretching from the SA border with Namibia in the north to the Plettenberg Bay area in the east. It would consist of an amalgamation of the distribution infrastructure and services of all involved local governments and the distribution assets of Eskom.

The City Council had started ring-fencing its electricity functions on 20 October 2004 with the intention of the newly formed entity being absorbed into the RED. This would enable the City to obtain an equity stake in the RED. The ring-fencing exercise already formed part of the City's overall restructuring plan.

Although the City was committed to the RED establishment process, it had a number of concerns that still had to be resolved. These included that the RED would have to contribute to the City's service and developmental objectives; that Eskom's distribution assets had to be transferred to the City with Eskom being compensated by national government; that ownership of the customer be clarified; that the management and implementation of billing systems be clarified; that legal challenges be resolved and that the City's public lighting function be retained at City level.

Discussion
Adv H Schmidt (DA) enquired about the overall structure of the RED; whether Eskom's role in distribution would be diminished; whether Eskom's assets would be taken over by the City; whether Eskom would compete with the RED and whether the City would experience a shortfall in revenue and, if so, its impact on local rates and taxes.

Mr Marsden responded that the concept of REDs had been established by the White Paper on Energy Policy that determined that Eskom's future role would be limited to electricity generation and transmission. This would introduce competition to the local electricity industry and would attract foreign investment. The White Paper also determined that a RED would be owned by national and local government. No decision on the transfer of Eskom's distribution assets had been taken. They could revert to the State as the majority shareholder or could be transferred to the local authority with compensation being offered to Eskom.

At this point, the City of Cape Town derived only 10% of its overall revenue from electricity sales, the benchmark set by the National Electricity Regulator (NER). The formation of RED 1 should therefore have no impact on rates and taxes.

Mr C Kekana (ANC) enquired about the City's overall indigent policy and asked whether its pre-paid electricity system really addressed indigence. Mr Mowzer answered that the City had a pro-poor policy as every citizen received 50kw free electricity while assistance to the poor was also provided in respect of property rates and charges for water, sewerage and sanitation.

Ms Tinto (ANC) wanted to know if agreement had been reached on the future of Eskom's distribution assets. She also asked who exactly received free, basic electricity and whether the City's advisers on the RED 1 formation process were a black economic empowerment company.

Mr Mowzer replied that the City believed it should receive Eskom's distribution assets. The Minister of Minerals and Energy appeared to support this position. All Eskom infrastructure and personnel would therefore be transferred to the RED on its establishment. He added that the City had a BEE procurement policy that stated that at least 30% of goods and services had to be procured from BEE companies. The advising company was majority black-owned.

Mr Schmidt asked who else distributed electricity in the projected RED 1 area; whether his earlier question on competition would be answered and whether the City Council was not pre-empting the legislative requirements by going ahead with the ring-fencing of electricity at this point.

Mr Mowzer answered that 18 to 22 municipal councils also distributed electricity within the targeted area. Eskom would not compete with the RED on electricity distribution because it would no longer be involved in distribution. However, overall competition in the electricity industry would be enhanced. Fragmentation would end and massive new investments would be made in generation capacity and the extension of the national transmission grid.

Mr Mowzer added that the restructuring of the electricity distribution industry started in 1995 and that government had taken a decision on the formation of REDs as early as 1996. There could, therefore, be no question of pre-emption as the process was irreversible and ongoing. All that remained was for the role players to follow the processes prescribed by law. The ring-fencing exercise by the City was part of a larger restructuring exercise that had started before the RED establishment process and could therefore not be linked.

The Acting Chairperson commented that he could not understand how Eskom would happily part with some of its prize assets and wanted to know if Eskom's power stations would also be transferred to the RED.

Mr Marsden was at pains to point out that Eskom's power stations were part of its electricity generation assets and that they would not be involved in any asset transfer should it take place.

The Acting Chairperson concluded the meeting by stating that the RED issue appeared a lot more complex than he had initially thought and he invited the City of Cape Town to keep the Committee abreast of developments.

The meeting was adjourned.